Lou
Grumet’s proposal, that everyone be required to file
a tax return (Publisher’s Column: “Fixing the
Income Tax: Transparency and Simplicity,” June 2005),
is excellent. The benefit that he mentioned of reducing
tax-evasive behavior is very important, with psychological
and citizenship byproducts that would help our country immeasurably.

The
project, however, would require a bold legislature. Of course,
if the Simple Exact Transparent (SET) tax is adopted, I
will get my wish. If, as is more likely, it is not adopted,
then this meritorious idea will have to swim on its own,
a daunting prospect.

Stanley
Goldstein, CPA
Scarborough, N.Y.

FASB
Biased?

Thank
you for Dennis Beresford’s article, “Can We
Go Back to the Good Old Days?” (December 2004). Those
of us who are neither partners of public accounting firms
nor members of FASB have been complaining about unnecessary
complexity for years. Yet drafts, standards, interpretations,
and concept statements continue to multiply and become ever
more complex. Modern accounting standards include complicated
mathematical models to support far-reaching assumptions
and predictions.

I suggest
that this trend is largely due to the composition of FASB.
The current seven-member board consists of academics, technical
analysts, and—the largest group—former partners
and managers of public accounting firms. The board has one
member from the preparer community, but people who actually
use financial statements to make lending and investment
decisions are not represented.

Given
the current makeup of FASB, it is no surprise that rulings
are biased towards more complex, theoretical pronouncements.
Accounting complexity serves to enhance the importance (and
income) of professors, technicians, and auditors.

Martin
Steine, CPA

Editor’s
Note: At present two of FASB’s seven board
members, George J. Batavick and Leslie F. Seidman, were
formerly preparers. Batavick’s positions at Texaco
included comptroller. Another current board member, Donald
M. Young, has used financial statements in a variety of
analyst positions at companies, including PaineWebber/UBS
and Lehman Brothers.

This
diversity among its board members’ experience has
generally been in evidence for most of FASB’s history
since it was established in 1973.

Fixing
Social Security

I’m
responding to Eric Rothenburg, whose response to Theodore
Gruber was published in “Inbox: Letters to the Editor”
(June 2005). With regard to investment returns over the
five years ended March 31, 2005, I would like to note that
the average large-cap blend fund listed on the Morningstar
database (1,624 different mutual funds) returned –2.88%
per year. Compounded annually, that means $10,000 invested
five years ago would be worth $8,641 today, for a total
loss of 13.6%.

If
Mr. Rothenburg has lost the 50% to 60% he claims, he is
a) incredibly unlucky, b) taking on way too much speculative
risk with his investments, or c) misreading his statements
and his performance altogether. Had Rothenburg invested
in the average of the 135 largest large-cap blend funds
with assets in excess of $1 billion each, his five-year
average annual rate of return would have been –1.89%
and his 10-year average rate of return would have been 10.57%,
turning the $10,000 into $27,313 over the 10-year period.

His
short-term thinking and exaggeration is the cause of the
typical American investor’s failure to reap the rewards
of investing. If you would like to see what really happens
when disciplined actions are taken by a typical retiree,
the Microsoft Excel spreadsheet shown in the Exhibit
is a record of actual results achieved by a retiree participating
in a 401(k) plan that I oversee.

Unfortunately,
the 50% loss in equity holdings is true. I monitor it every
day to see if it will ever go above that threshold.

I was
told in January 2000 that the dot-com craze was going to
expand even more. I invested money in two high-growth funds:
Putnam Voyager Fund and Putnam Growth and Opportunities
Fund. If you remember, the NASDAQ index reached 5250 in
March 2000. Right now, the NASDAQ is at 2100. Using the
percentage change formula, that is a net loss of 60%. To
compound things further, these funds generally were invested
in stocks that paid no dividends to mitigate the capital
losses.

I believe
that the longer the time horizon, the less these losses
will be. However, five years later, I am still –50%.
Oil prices have now reached $60/barrel, and inflation and
interest rates are increasing. We cannot assume that future
events are dependent upon past events. If they were, everyone
would have invested in the Dow components of 50 years ago.
Looking at AT&T and General Motors, we can infer that
these are not mathematical equations that will always hold
true.

Luckily,
only 10% of my portfolio was in the aforementioned Putnam
funds. However, what if I was now ready to retire and I
had 100% of my funds in these funds? And I am a CPA. Can
ordinary investors be hoodwinked the way I was? You better
believe so.

Simply
put, let’s keep Social Security intact. We cannot
play Russian Roulette with retirement money. If you are
wealthy and lose, so what? Your investments are almost certainly
diversified. The working-class and middle-income people,
however, might not be able to sustain such a loss. That
is why privatizing Social Security is definitely the wrong
way to go. We have already seen that privatization has been
unsuccessful in other countries. Let’s think about
income demographics besides the rich for a change. Then,
we will see a well-balanced and -fueled economy. The “trickle-down”
theory of supply-side economics has never worked and never
will.

Eric
Rothenburg, CPA
Associate Professor
Kingsborough Community College
City University of New York

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